CHAPTER 2- PURCHASING CHAPTER 2- PURCHASING MANAGEMENTMANAGEMENT

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 2

Learning ObjectivesLearning Objectives

You should be able to:– Describe the role of purchasing and understand its impact on

an organization’s competitive advantage.– Have a basic knowledge of manual purchasing and e-

procurement.– Understand and know how to handle small value purchase

orders.– Understand sourcing decisions and the factors impacting

supplier selection.– Understand the pros and cons of single versus multiple

sourcing.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 3

Learning Objectives- Cont.Learning Objectives- Cont.

– Describe centralized, decentralized, and hybrid purchasing organizations and their advantages.

– Describe and understand how globalization impacts, purchasing, and describe and understand the opportunities and challenges of global sourcing.

– Understand total cost of ownership and be able to select suppliers using more than unit price alone.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 4

Chapter Two OutlineChapter Two Outline

• The Role of Purchasing in an Organization• The Purchasing Process• Sourcing Decisions: The Make-or-Buy Decision• Roles of Supply Base• Supplier Selection• How Many Suppliers to Use• Purchasing Organization: Centralized versus • Decentralized Purchasing• International Purchasing/Global Sourcing

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 5

IntroductionIntroduction

Purchasing- Obtaining merchandise, capital equipment; raw materials, services, or maintenance, repair, and operating (MRO) supplies in exchange for money or its equivalent.

Merchant Buyers-wholesalers and retailers who purchase for resale.

Industrial Buyers- purchase raw materials for conversion, services, capital equipment, & MRO supplies.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 6

The Role of Purchasing in an The Role of Purchasing in an OrganizationOrganization

The primary goals of purchasing are:1. Ensure uninterrupted flows of raw materials at the lowest total cost,

2. Improve quality of the finished goods produced, and

3. Optimize customer satisfaction.

Purchasing contributes to these objectives by: – Actively seeking better materials and reliable suppliers,

– Work closely with strategic suppliers to improve quality materials, and

– Involving suppliers and purchasing personnel in new product design and development efforts.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 7

The Purchasing ProcessThe Purchasing Process

Manual Purchasing-Older system, prone to duplication of effort and error

Step 1-Material Requisition/Purchase Requisition- stating product, quantity, and delivery due date are clearly.

Step 2- The Request for Quotation (RFQ)- Buyer identifies suppliers & issues a request for quotation (RFQ). Step 3- The Purchase Order (PO)- The purchase order is the buyer’s offer & becomes a binding contract when accepted by supplier.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 8

The Purchasing Process- Cont.The Purchasing Process- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 9

The Purchasing Process- Cont.The Purchasing Process- Cont.

Electronic Procurement (e-Procurement)

Step 1- Material user inputs a materials requisition- relevant information such as quantity and date needed.

Step 2- Materials requisition submitted to buyer- at purchasing department (hardcopy or electronically).

Step 3- Buyer assigns qualified suppliers to bid- Product description, closing date, & conditions are given.

Step 4- Buyer reviews closed bids & selects a supplier

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 10

The Purchasing Process- Cont.The Purchasing Process- Cont.

Advantages for the e-Procurement System

– Time savings– Cost savings– Accuracy– Real time– Mobility– Trackability– Management– Benefits to the suppliers

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 11

Small Value Purchase OrdersSmall Value Purchase Orders

Processing costs can be substantial. Small value purchases should be minimized through: •Procurement Credit Card/Corporate Purchasing Card•Blank Check Purchase Orders•Blanket or Open-End Purchase Orders•Stockless Buying or System Contracting•Petty Cash•Standardization & Simplification of Matls & Components•Accumulating Small Orders to Create a Large Order•Using a Fixed Order Interval

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 12

Sourcing Decisions: The Make-or-Sourcing Decisions: The Make-or-Buy DecisionBuy Decision

• Outsourcing -buying materials and components from suppliers instead of making them in-house. The trend has moved toward outsourcing.

• Backward integration refers to acquiring sources of supply

• Forward integration refers to acquiring customer’s operations.

The Make or Buy decision is a strategic decision.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 13

Sourcing Decisions: The Make-or-Sourcing Decisions: The Make-or-Buy Decision- Cont.Buy Decision- Cont.

Reasons for Buying or Outsourcing • Cost advantage: Especially for components that are non-vital to the

organization’s operations.

• Insufficient capacity: A firm may be at or near capacity.

• Lack of expertise: Firm may not have the necessary technology and expertise.

• Quality: Suppliers have better technology, process, skilled labor, and the advantage of economy of scale.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 14

Sourcing Decisions: The Make-or-Sourcing Decisions: The Make-or-Buy Decision- Cont.Buy Decision- Cont.

Reasons for Making

• Protect proprietary technology • No competent supplier• Better quality control• Use existing idle capacity• Control of logistics- lead-time transportation,

and warehousing cost• Lower cost

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 15

Sourcing Decisions: The Make-or-Sourcing Decisions: The Make-or-Buy Decision- Cont.Buy Decision- Cont.

The Make-or-Buy Break-Even Analysis

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 16

Roles of Supply BaseRoles of Supply Base

Supply Base- suppliers that a firm uses to acquire its materials, services, supplies, and equipment.

Firms emphasize long-term strategic supplier alliances consolidating volume into one or fewer suppliers, resulting in a smaller supply base.

Preferred suppliers provide:– Early supplier involvement- Information on the latest trends in materials,

processes, or designs– Information on the supply market– Capacity for meeting unexpected demand– Cost efficiency due to economies of scale

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 17

Supplier SelectionSupplier Selection

– Product and process technologies

– Willingness to share technologies and information

– Quality– Cost– Reliability

– Order System and cycle time

– Capacity– Communication capability– Location– Service

The process of selecting suppliers, is complex and should be based on multiple criteria:

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 18

How Many Suppliers to Use How Many Suppliers to Use 

Reasons Favoring a Single Supplier

• To establish a good relationship• Less quality variability• Lower cost• Transportation economies• Proprietary product or process• Volume too small to split

Reasons Favoring More than One Supplier

• Need capacity• Spread risk of supply

interruption• Create competition• Information• Dealing with special kinds of

business

Single-sourcing- a risky proposition. Although trends favor fewer sources, avoid single source.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 19

Purchasing: Centralized vs. Purchasing: Centralized vs. Decentralized  Decentralized  

Purchasing Organization dependent on many factors, such as market conditions & types of materials required.

– Centralized Purchasing- purchasing department located at the firm’s corporate office makes all the purchasing decisions.

– Decentralized Purchasing- individual,

local purchasing departments, such as plant level, make their own purchasing decisions.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 20

Purchasing: Centralized vs. Purchasing: Centralized vs. Decentralized  Decentralized    

Advantages- Centralization– Concentrated volume-

leveraging purchase volume– Avoid duplication– Specialization– Lower transportation costs– No competition within units– Common supply base

 

Advantages- Decentralization– Closer knowledge of

requirements

– Local sourcing

– Less bureaucracy

A hybrid purchasing organization- both decentralized at the corporate level and centralized at the business unit level may be warranted.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

© 2005 Thomson Business and Professional Publishing 21

International Purchasing/Global International Purchasing/Global SourcingSourcing

Global sourcing- – Opportunity to improve quality, cost, and delivery performance. – Requires additional skills and knowledge to deal with

international suppliers, logistics, communication, political environment, and other issues. 

• Import broker or sales agent- performs service for a fee. • Import merchant- buys and takes title to the goods. • Trading company- imports & carries wide variety of goods.